Corporate Governance Charter for Startups

GS-3 Mains ; Economy

Question : Critically analyze the challenges faced by startups in India in ensuring sound corporate governance.

Context:

Launched by the Confederation of Indian Industry (CII) to address concerns about governance in startups.

Purpose:

Provides tailored suggestions for startups to enhance their governance practices.
Offers guidelines for different stages of a startup’s lifecycle (inception, progression, growth, going public).

Key Features:

Self-Evaluative Governance Scorecard:
- Online tool to assess current governance status and track progress over time.
- Measures adherence to recommended governance practices.
Stage-Specific Guidelines:
- Inception: Focus on board formation, leadership, compliance, finance, and conflict resolution.
- Progression: Expand board oversight, monitor key metrics, define decision-making hierarchy, establish audit committee.
- Growth: Build stakeholder awareness, form board committees, ensure diversity and inclusion, comply with legal requirements.
- Going Public: Monitor committees, focus on fraud prevention, minimize information asymmetry, plan for succession, evaluate board performance.
Additional Considerations:
- Long-term value creation over short-term valuations.
- Separation of founders’ personal needs from business needs.
- Alignment of founders’, promoters’, and investors’ goals with the company’s long-term vision.
- Maintaining the startup as a separate legal entity with distinct assets from founders’.

Corporate Governance in India

What is Corporate Governance?

System of rules, practices, and processes for directing and controlling a company.
Balances the interests of various stakeholders: shareholders, customers, suppliers, government, community.
Involves:
- Explicit and implicit contracts defining rights, responsibilities, and rewards.
- Procedures for resolving conflicting stakeholder interests.
- Proper supervision, control, and information flow (checks and balances).

Regulatory Framework:

The Companies Act, 2013: Defines board composition, independent directors, director training, audit and risk management committees, subsidiary management, etc.
Securities and Exchange Board of India (SEBI): Regulates financial markets, protects investors, and ensures healthy development.
Standard Listing Agreement of Stock Exchanges: Ensures listed companies follow good corporate governance practices.
Institute of Chartered Accountants of India (ICAI): Issues accounting standards for financial information disclosure.
Institute of Company Secretaries of India (ICSI): Issues secretarial standards as per the Companies Act, 2013.

Challenges:

Board Composition: Promoter dominance with friends and family on boards.
Performance Evaluation of Directors: Lack of transparency and public scrutiny.
Removal of Independent Directors: Vulnerability to removal by promoters for dissent.
Founder Control and Succession Planning: Overly strong founder control hindering governance.
Risk Management: Need for stronger board oversight and risk management policies.

Corporate Governance in India

Committees for Resolving Issues

Kumar Mangalam Birla Committee (1999):
- Suggested recommendations for listing agreements.
- Developed a Code of Governance adopted by SEBI.
- Led to a new Clause 49 in listing agreements.
N R Narayana Murthy Committee (2003):
- Recommendations led to a revised Clause 49 by SEBI.
- Included amendments on independent directors, audit committee responsibilities, and formal codes of conduct.

Importance of Corporate Governance

Strengthens Investor Confidence: Strong governance builds trust, allowing companies to raise capital efficiently.
International Capital Flows: Enables companies to benefit from global markets, boosting economic growth.
Increased Productivity: Minimizes waste, corruption, risks, and mismanagement.
Brand Image: Enhances brand formation and development, attracting foreign investment.

Startups in India (as of 2023)

Definition: A startup ceases to be one after 10 years or exceeding ₹100 crore in annual turnover.
Number: Over 99,000 government-recognized startups.
Location: 49% based in Tier 2-3 cities, spread across 669 districts in India.
Unicorns: India has 108 unicorns (private startups valued over $1 billion) with a total valuation of $340.80 billion.